Antitrust and Monopolies

posted by Nima

November 17, 2008 · Posted in Interventionism 

The Objectives of Antitrust Intervention

Public opinion believes that the societal apparatus of compulsion and coercion, the government, should protect individuals from monopolies: Monopolies restrict the supply of products and harm the welfare of the common man. The government has to step in and put and end to this injustice. Its intervention is supposed to foster free enterprise and fair competition and protect the poor and hapless from powerful corporations.

The term monopoly needs to be defined more precisely here. There are two types of monopolies which have completely different implications.

The supporter of antitrust enforcement by the government does not make a distinction between the two and hence arrives at flawed conclusions.

There are the Coercive Monopoly and the Market Monopoly.

The Coercive Monopoly is a business which is protected from competition by the government. It is not the monopoly that needs to be discussed here. It is, indeed, a monopoly that harms the consumers and benefits those who are protected. All that would need to happen to end this type of monopoly would be for the government to withdraw itself.

The type of monopoly in question is the ‘Market Monopoly’: Antitrust proponents claim that an unhampered free market produces market monopolies and that it is the government’s job to prevent this from happening.

The Market Monopoly

The market monopoly is a business that operates on a voluntary market. A business in that environment is comprised of a group of people that jointly works towards withdrawing factors of production (raw materials, labor, etc.) from the market in voluntary contracts, and combines them in lines of production where they create goods that are, from the consumer’s point of view, worth more than where the factors were employed prior to withdrawal, aiming for an entrepreneurial profit.

This in itself is nothing but the schoolbook definition of a business on the free market, seeking to make a profit. The particular thing about a business that holds a market monopoly is that there is no other one that sells the same good.

But this does not change the fact that, based upon the law of marginal value preference, the market monopoly business has to set its price based upon consumer response. It cannot charge an infinite price for its goods. It also does not change the fact that it has to produce a useful product that satisfies a consumer demand. It also does not change the fact that this whole process is completely voluntary and peaceful on the part of the seller, as well as on the part of the buyer. It also does not change the fact that capitalists always stand ready to provide capital to entrepreneurs who are completely free at any time to identify cheaper processes and sell at cheaper prices and/or better quality, outstripping the previous monopoly, and ultimately reaping a profit to satisfy the profit-seeking capitalists, while at the same time improving the consumer’s situation.

Yet, for the sake of the antitrust proponents’ argument, we shall pass in silence all these facts and inquire as to what effects the government’s antitrust intervention will have regardless.

The Antitrust Intervention

What antitrust proponents now ultimately suggest is that the government decree a maximum number of goods to be sold by this monopoly business, and step in with police force if the business dares to satisfy more consumers than allowed by its decree. The fact that the business, as well as the consumers, are merely acting voluntarily towards what they consider to be their best choice, does not interest the antitrust proponents: In their minds, the fact that the people, in their role as consumers with every penny and every dollar, are casting a conscious vote, by choosing to purchase the product they seek, is a mere expression of the ignorance and the gullibility on the part of the public. The government is omniscient, its will supreme. Its decree has to be followed and enforced when violated. How dare the consumers make the decision who to buy from!

The government employs market share statistics, based on the revenue generated from the products in question. It decrees, for example, that company XYZ, is not allowed to sell more than the equivalent of 40% market share worth of its, say, operating system software ABC. Why exactly 40%? Why not 39.95% Why not 40.1%? The approach is, without the slightest doubt, completely arbitrary.

The Consequences of Antitrust Intervention

After the government steps in and limits the supply of the goods in question, who ultimately suffers? The marginal consumers, who would have purchased the additional unit of the product whose supply has been cut off. The objective of protecting the average consumer from overpriced or bad products obviously fails. In fact, the policy attains the exact opposite.

After the government has intervened, sooner or later a new entrepreneur will step in and fill the gap with a similar good. However, he will not be under any pressure from from the previous market monopoly company. He merely stepped in to fill the gap, because the police intervened and outlawed by aggression any more sales from the market monopoly business. At this point, his position is not threatened at all. Due to his inexperience and lack of competitive pressure, his goods will most likely be inferior and more expensive than the previous market monopoly’s goods. It will take him much longer to get to a point where his product can measure up to the previous market monopoly business’s product. Economies of scale will set in at a much later stage for this entrepreneur, so as he increases production, his prices will not drop as fast as previously. Marginal consumers will have to do with his inferior, higher priced product.

The fact that a new entrepreneur steps in to fill the gap will not in the slightest make the market more competitive or fair. Quite the opposite: The coercive intervention creates a less competitive environment with less competitive pressure for the new business, since it doesn’t have to fear competition from the previous market monopoly business, and the consumers ultimately suffer.

The intervention sends out the message that as an entrepreneur you shouldn’t strive for perfection when selling to consumers. For if your product becomes too popular your output might be restricted by the government.

Furthermore, it encourages the entrepreneur to attain a good standing in government, and thus to allocate funds toward bribing the politically connected in the form of campaign contributions, rather than invest in factors of production that would increase the output of consumer goods in the future.

Thus the policy doesn’t help the consumer at all and is bound to fail at attaining the stated objective.

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